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The Law & You: How Disclosure Forms Reduce Risk

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For well over a decade, NAR statistics have shown that the leading sources of litigation against real estate practitioners are lawsuits alleging either misrepresentation or failure to disclose a material fact. Most of these suits are brought by a homebuyer against the seller and all real estate practitioners involved in the transaction.

In 1990 NAR focused on the use of property condition disclosure forms as a way to reduce the number of these cases against real estate professionals. At that time, only two states (Maine and California) required the use of such forms. But during the past 10 years, a majority of states have enacted legislation or regulation mandating the use of property condition disclosure forms. Most of the states’ statutes make clear that although the form doesn’t constitute a warranty by the seller or the seller’s agent, it’s intended to give purchasers information they can rely on when deciding whether to buy the property and under what terms.

Now, 10 years later, cases in which property condition disclosure forms were used have made their way to the courts. Although sellers and their agents continue to be sued, the decisions being handed down suggest that the disclosure forms--when properly used--are an extremely effective tool in reducing the cost of litigation to real estate brokers.

The lesson is very clear: Transactions in which sellers made a good faith effort to reveal potential defects they knew about have led to rapid judgments in their favor. At times, courts have even scolded buyers for failing to do an adequate job of looking after their own interests after a potential problem was noted on the disclosure form.

Furthermore, practitioners aren’t being held liable for sellers’ inaccuracies or omissions on the disclosure statements unless they knew about them.

On the other hand, when sellers or their agents have attempted to use the property condition disclosure forms to deceive or mislead purchasers, the courts have been equally swift in ruling against them.

For example, in the California case of Williams v. Wells and Bennett, the seller--after listing her property with the defendant broker--toured the property with the listing agent, pointing out a large crack in the floor of the garage that extended through the family room. The seller advised the salesperson that the crack was caused by shifting earth. The seller then gave the salesperson the keys to the home and moved to Louisiana. When the purchasers viewed the property, the crack in the garage floor had been filled and the crack in the family room had been completely covered with tile.

A property condition disclosure form had been completed by the seller and the salesperson and provided to the buyer. The seller had answered yes to the question about her awareness of any significant defects but then had proceeded to check no to each of the possible defects listed on the form. The result, according to the court, was that no defect was disclosed by the seller. The salesperson’s portion of the form read “No adverse conditions noted other than cosmetic repair.”

The buyers had a post-purchase inspection that revealed more than $150,000 in damage to the foundation. The court of appeals had no difficulty reversing the lower court’s dismissal of the complaint against the listing broker and salesperson, who had repaired the crack in the garage and tiled the family room.

In contrast, the Iowa Court of Appeals in Arthur v. Brick addressed the adequacy of the seller’s disclosures regarding a property that flooded with rainwater and sewage shortly after the buyers moved in. The buyers claimed that the seller or his agent or both had misrepresented the property by indicating on the disclosure statement that there were no sewer problems when, in fact, a drain in the backyard was illegally connected to the sanitary sewer.

In analyzing the case, the court noted the judicial trend away from the doctrine of caveat emptor (buyer beware), including the sellers’ statutory obligations to complete disclosure forms. The Iowa statute obligates sellers to make a good faith disclosure of information known to them at the time the disclosure is made. In this instance, the seller answered no to the question about any known problems with the sewer but answered yes to the question about structural modifications, alterations, or repairs made without necessary permits or licensed contractors. Furthermore, the seller answered yes to the question about settling, flooding, drainage, or grading problems and indicated that “remodeling was done in ’93–’94 without city permits--backyard has sewer that needs to be kept clean.” The court found that the seller had properly disclosed all information of which he was reasonably informed.

A number of other cases consistent with this pattern have been decided within the past few years in other jurisdictions.

The inescapable conclusion is that the proper use of property condition disclosure forms is an effective tool to shield sellers and real estate professionals from claims by buyers of misrepresentation or failure to disclose.

Disclose the right way

To gain the most protection from disclosure forms:

Always insist that the seller complete the form.

Make sure the disclosures are consistent with what you know or have observed about the property.

If you’re a broker in a state that doesn’t yet require the use of such forms, seriously consider adopting an office policy calling for their use.

Laurie K. Janik was general counsel for the NATIONAL ASSOCIATION OF REALTORS® from 1987 to November 2013.

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